Buy to Let or Pension?

Hi,
This is a question about whether I should sell my investment property, pay off two mortgages and put contributions into a pension scheme instead.

I borrowed equity on my own house 2.5 years ago to buy an investment property. Both are in Dublin 8. The outstanding mortgage on both is 350k, split pretty evenly between the two. I pay capital and interest on my home but interest only on my investment. If I sold the investment property now, I could make between 380-400k. That should be enough to pay off my own home mortgage, the investment mtg and capital gains tax. I could then use my own home mtg repayments (about 1300 pm) for AMV's on my pension. I have a very bad self contributory pension now which I only started aged 40--I was on contract up to then and am not elgibile for a defined benefit pension. I am aged 54 and in a semi state job so will only have a salary for the next 10 years. I don't even know who to go for for advice. Does the rent on one house offset the interest I will pay over 10 years on both? I have no other debts and am single. I really would appreciate any advice or thoughts. Best, J

I sold my investment properties last year and used the proceeds to pay off those mortgages and take a chunk off my PPR mortgage. I have also increased my pension contributions. You have nearly 20 years on me so my circumstances are different. My inclination is to say yes, you should sell up but as I don't know your % yield or your personal circumstances and I'm no expert your first step is to seek independent advice. Have a look at the key posts here for more info.

Hi, thanks for your post. I have only been able to save 150k towards my current defined contribution pension. I am renting the investment property for 1100 pm and if I pay capital plus interest (plus insurance) it comes to that amount. I actually pay about 700 interest only (it was to get me through the first couple of years as a land lady should any emergencies arise). I paid 240 for the house (two up, two down red brick near the Luas), put in another 20 to upgrade, so it cost me 270 including stamp duty and legal fees. Similar houses are currently selling for 380-400k.

I also pay 1300 pm on my own house--largely because I borrowed 100k equity on my own house to buy the investment property, so I doubled my own mtg...which realistically means I am paying for some of the investment property myself (to the tune of about 400 pm). I can raise the rent next time around to 1300 as that is the going rate but over the years there will be repairs etc. and as I cannot guarantee to be making a salary in 11 years, such things might prove prohibitive. I also would like to ditch the interest only and go cap + interest if I keep the property.
I currently make about 70k per year and don't evisage any windfalls coming my way! Have searched the net high and low trying to find an indie financial advisor but all seem to be linked to banks etc. best, j

PS...I also don't think I am particularly suited to the role of land lady as I am a worrier by nature...but the question is whether switching to a new pension would balance out over the long haul vis a vis the money I would save in interest over 20 years (and factoring in that the tenants will be contributing).

joiedelivre said:

Have searched the net high and low trying to find an indie financial advisor but all seem to be linked to banks etc.

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Have you lookedhere in the Savings and investments key posts section? Look through the list for the Authorised Advisors.

Hi joiedelivre,

Some notes on your question and further comments.

As you said banks of not a good place for Independent Financial Advice. The Qualified Financial Advisors there are realistically Financial Salespeople who have the banks interest in mind. Even small so called independent places can be a mine field. Most of them make money from commision on funds you buy into through them. You'd have to find someone that operates on a fee only basis. I don't have a recommendation here I'm afraid.

The 100k you took as an equity release should be used on all calculations to do with your investment property. Also you are entitled to use the interest component of this 100k in reduce your liability for tax on rental income.

Reading between the lines of your €700 per month repayment I calculate you have an IO mortage of approx €160k. Adding the €100k of equity release that's total borrowings of €260k. The Interest on this would be approx €1125 per month (at 5.2% IO - thus ignoring capital repayments). Thus your gross yield at purchase (including refurb) was 1100/260k = 4.2%. Your current hypotetical gross yeild based on possible rent of 1300 and current estimated valuation of €380k is 3.4%. Your net yield (taking account of insurance, rental void periods, yearly repair costs, and management company charges if appropriate) is lower than this.

Not everyone will agree with me here but I think a 3.4% (and the orig 4.2%) gross yield is far to low. Most property investment books etc. would recommend a gross yield for a buy to let of in excess of 7%. The reason being, so that you can cover your cost of finance (5.2%) and other costs as above. In past years the low yield could be accepted because of substantial gains in the property's value. Most recent statistics would indicate that this period has ended. The market would appear to have stagnated and possibly property prices have dropped over the last 6 months. As your yield is lower than your cost of finance, you have to think about whether you think their is potential for property price gain (and also rental price gain) over the next 10 years. No one can acurately call the market at present. I'm not going to and I'm not allowed do this here anyway.

There is also a hassle factor with buy to let that is often discarded. You are resposible for maintenance on the place and have to deal with problem tenants in a professional but financially protective manner and put up with void periods if things go wrong. You did say you're a bit of a worrier.

With regard to your pension. At 54 you can contribute up to 30% of your salary tax free (at the higher rate of 41%) and PRSI free. That means you could be putting €1750 per month into it on your Salary of €70k. That would only make a difference of circa €1000 per month to your take home pay. The tax relief on pension contributions is the reason why you should try to max your pension out.

As you have a defined contribution pension the more you can put into it the more you get out. You can also take a good chunk of it out
as a lump sum in 11 years time (assuming you retire at 65) if you wish.

Personally, I favour the pension. I also favour equities, particuarly European Blue Chip (such as those on Eurostoxx50) over residential property. That's me though, you need to think this through yourself.

Hi, I really appreciate all the information. My brain goes a bit numerically dyslexic with the crunching. My gut feeling is to sell and enjoy my life! I will be making the decision over the next few days. Thanks again, J.

robd said:

Hi joiedelivre,
The market would appear to have stagnated and possibly property prices have dropped over the last 6 months. As your yield is lower than your cost of finance, you have to think about whether you think their is potential for property price gain (and also rental price gain) over the next 10 years. No one can acurately call the market at present. I'm not going to and I'm not allowed do this here anyway.

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Why can't we talk about the state of the property market in a forum about property investment?

New_Buyer said:

Why can't we talk about the state of the property market in a forum about property investment?

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Nothing to do with me. Check the posting guidelines as written by the owner of the site. See here: His site, his rules. I attempt to stick to them as I'd prefer not to be banned.

robd said:

Nothing to do with me. Check the posting guidelines as written by the owner of the site. See here: His site, his rules. I attempt to stick to them as I'd prefer not to be banned.

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Thats bizare!!
The most significant financial most people will make in their lifes and you can't discuss it on a dedicated financial forum.
Why just let people share their views so that people can make an informed decision before making a decision.

I would have thought the state of the property market is very relevant to this question. People in Ireland tend to have more investments or interests in the property than in any other types of financial products so it does seem rather strange that a financial site will not allow a discussion of this.

I've been thinking long and hard about your very good comments. Is it worth trying to figure out how much I would lose in interest payments over 20 year x 2 mortgages? I am trying to extrapolate roughly how much I might pay in interest rates against what I might gain in property increase and see if they cancel each other out. I know it is not an exact science, but have you any suggestions re: how I might try and figure it out?